As the healthcare industry evolves, more and more health and wellness providers are choosing to move into retail centers. These “medtail” tenants are driving much of the retail leasing activity right now, leading to a supply-demand imbalance in highly visible centers and allowing retail real estate owners to generate higher rental rates, particularly for end caps and outparcels.
As Americans pay more attention to preventative healthcare, providers are no longer focused exclusively on treating patients when they’re sick, but also keeping them healthy. This increased emphasis on prevention and wellness has given rise to a wide range of tenants that find retail environments particularly attractive.
“Medtail tenants are really thriving today,” says Ryan Ash, project director with Vestar, a Phoenix-based shopping center owner, developer and manager with a portfolio totaling 30 million sq. ft. throughout the western states. “We’re seeing a lot of interest from a combination of national brands and private operators have expressed interest in moving into our centers. We’ve been cutting a lot of deals over the past 18 months or so.”
Consider Vestar’s Queen Creek Marketplace in suburban Phoenix: the 900,000-sq.-ft. regional power center is home to several medtail tenants, including Alliance Urgent Care, Pacific Dental, The Joint Chiropractic, Prime IV Hydration & Wellness and America’s Best Contacts.
Similarly, another Vestar property located in suburban Phoenix—Crossroads Towne Center—features several medtail tenants, including a primary care practice, East Valley Family Health, Crossroads Dental, and a new wellness concept called Cryoshift Cryotherapy.
“We are fans of medtail,” Ash says. “We think it’s a great complementary use for our centers. As retail has changed over the years and become much more dynamic, we’ve seen that a combination of different uses creates an environment where all tenants thrive.”
More than urgent care centers and dentists
Though medtail is not a new concept, it is one that continues to evolve and expand. While urgent care providers, dental clinics and vision centers were the first to realize the value of retail settings, other health and wellness providers are now seeking out retail spaces. And with the closure of many retail and restaurant tenants due to the pandemic, medtail tenants have had an opportunity to lease retail space that wasn’t formerly available to them.
“They are looking for high visibility, high traffic shopping centers rather than the medical facilities,” says Ashley Casey, senior director of national accounts with Cincinnati-based Phillips Edison & Co. (PECO), one of the largest grocery-anchored center owners in the nation with a portfolio of nearly 290 shopping centers comprising roughly 30.4 million sq. ft. across 31 states.
The entire category of health and wellness is expanding to include more than traditional medical, dental and vision uses, Casey says. For example, alternative medicine and healthcare such therapeutic massage, chiropractic medicine and acupuncture are fast growing medtail uses. Likewise, several cryotherapy operators and physical therapy operators have a marked preference for retail locations.
For example, PECO’s 2020 redevelopment of Murphy Marketplace in a far northern suburb of Dallas attracted several medtail tenants, including Restore Hyperwellness, America’s Best, Results Physiotherapy and Total Men’s Primary Care. Casey says the new medtail tenants choose high visibility, easy access spaces and joined existing medtail tenants Sinai Urgent Care, MyEyeDr, Monarch Dental and Dental One.
Cosmetic wellness—clinics focusing on skin and body treatments that require the oversight of a licensed physician—is also expanding at a rapid pace.
Positive contributors to shopping centers
Most retail real estate owners and developers consider medtail to be just as attractive, if not more so, than restaurants and service-oriented businesses such as dry cleaners and nail salons. “Owners are looking at medtail tenants a little more favorably because they’re mostly Internet-proof,” says Joe Miller, managing director and head of retail with JLL Valuation Advisory.
They’re not just Internet-proof, either. They’re “sticky” tenants too.
“Medtail tenants tend to sign longer-term leases because they have to invest a lot of money to get set up in a space, and they need time to establish their presence within a community,” Casey says. “That makes them attractive to owners and any other investors.”
In addition to serving as a differentiating tenant for a center, medtail tends to generate foot traffic and cross shopping. Many medtail uses have tenant synergies with traditional retailers, says Brian Finnegan, executive vice president and chief revenue officer for Brixmor Property Group. “For example, the wellness aspects of chiropractic, massage and acupuncture are complementary to some of the athletic wear that an apparel operator may want to sell,” he notes.
Traditional retailers warm up to medtail
Historically, traditional retail tenants have been less than welcoming of medtail tenants. Traditional retailers, particularly those that served as center anchors, had not seen enough evidence to convince them that medtail tenants would benefit the center.
That’s why it is common for older anchor leases and national tenant leases to include restricted use clauses that prohibit medical-oriented tenants. In fact, that’s one of the biggest challenges that owners and landlords face when leasing space to a medtail tenant.
“We’re having to go through all these legacy national tenant leases and see whether or not we’re actually able to lease to medtail users,” Ash notes.
Traditional retail tenants are primarily concerned about two things: parking and cross shopping. There’s a misperception that medical tenants are parking hogs and don’t have the ability to generate cross shopping revenue like traditional retailers.
“The good news is that I think a lot of the national tenants that have these restrictive-use clauses are warming up to the idea that medtail has an overall net positive impact on a center and are granting waivers to landlords so we can lease to medtail tenants,” says Ash.
Some municipalities are also resistant to owners and developers leasing retail space to medtail tenants, according to JLL’s Miller. “I’ve seen municipalities push back on medtail because they’re not going to drive the same amount of sales tax that a retailer could,” he says.
Willing to pay for visibility
In the past, retail real estate owners and investors haven’t been on the same page with healthcare-focused tenants when it came to rental rates. More often than not, healthcare operators, whether they were primary care physicians or orthodontists, got a bit of sticker shock when they initially explored the idea of leasing space in a shopping center.
Instead of seeing the increased rent as a tradeoff for more visibility and the opportunity to expand their customer base and make it more resilient, these operators were focused on occupancy costs.
Ash acknowledges that health and wellness tenants pay a premium for retail space compared to most traditional medical office buildings. “But I think med tenants are recognizing that benefits are worth the additional cost,” he says.
Like many traditional retail and restaurant tenants, today’s medtail tenants want endcaps and outparcels. This supply-demand imbalance is creating a competitive leasing environment, according to Brixmor’s Finnegan.
Across the REIT’s shopping center portfolio, medtail tenants are among those that pay higher rents, Finnegan says. “We’ve seen a lot of demand for high profile locations with a lot of visibility, and health and wellness tenants have been willing to pay aggressive rents to secure the locations they want.”
Landlords that generate a portion of their revenue through percentage sales also give up that income when they lease to pure medical uses (e.g. urgent cares, dental clinics and vision centers). However, most landlords can make up the difference by inking leases with medtail tenants at higher rental rates. Moreover, many medtail tenants have a higher quality credit profile than local or regional retailers and restaurant owners, and are therefore considered less of a risk.
“Medtail tenants can provide a lot of upside for landlords,” Miller says.